A Northern Currency that's Ready to Light Up

The Canadian dollar is poised to beat very low expectations, unlike one major currency we could name.

O, Canada. Why are so many investors short the loonie? Maybe they're worried about the U.S. economy, which always has a major effect on Canada. Or maybe they have concerns about Canadian growth itself. Whatever the reason, recent CFTC data shows leveraged investors have net short Canadian dollar positions.

Contrast that bearishness with investors' take on the euro. Bullish investors seem to be expecting multiple interest rate hikes before the end of the year — but meanwhile, rating agencies are issuing warnings about Greece and Portugal, and many experts believe the recent agreement on Greece just postponed a more dramatic resolution of the peripheral debt problems.

"We feel that the headwinds facing the euro zone will persist and likely intensify," Andrew Cox, a currency strategist at Citigroup, told me.

Cox expects Canada to provide surprises on the upside, including possibly from Friday's Canadian employment report. U.S. news could help as well, he wrote in a note to institutional clients: "First, given the close economic linkages between the US and Canada, indications of greater resilience in the US could be supportive for CAD. Second, positive economic surprises could also help support market risk sentiment and support risk-correlated currencies like CAD."

Citigroup today sold the euro against the Canadian dollar at 1.3850 with a stop loss of 1.4160 and a target of 1.3050, with a time horizon of about two months. If you like the idea, you can still get in at almost the same level.